Q3 2024 Marqeta Inc Earnings Call

Speaker Change: Ladies and gentlemen, greetings and welcome to the Mark Heta in 3rd quarter 2021 Morning's Concentral

Speaker Change: At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator systems during the conference, please press star and zero on your telephone keypad.

As a reminder, this conference is being recorded.

Speaker Change: It is now my pleasure to introduce your host, Stacey Finerman, Vice President of In-Master Relations. Please go ahead.

Stacey Finerman: Thanks, operator. Before we begin, I would like to remind everyone that today's call may contain forward-looking statements.

Stacey Finerman: These forward-looking statements are subject to numerous risks and uncertainties, including those that forth in our findings with the SEC which are available on our investor relations website.

Stacey Finerman: including our annual report on Form 10K for the period ended December 31, 2023, and our subsequent periodic filing with the SEC.

Stacey Finerman: Actual results may differ materially for many forward-looking statements we make today. These forward-looking statements speak only as of the time of this call, and the company does not assume any obligation or intent to update them, except as required by law.

Speaker Change: In addition, today's call includes non-gap financial measures.

Speaker Change: These measures should be considered as a supplement to, and not a substitute for, GAAP financial measures.

Speaker Change: Reconciliations to the most directly comparable gap measures can be found in today's earnings press release or earnings release supplemental materials which are available on our investor relations website.

Speaker Change: Hosting today's call are Simon Khalaf, Marquette's CEO, and Mike Milotich, Marquette's CFO. With that, I'd like to turn the call over to Simon to begin.

Simon: Thank you, Stacey. And thank you for joining us for Marketa's third quarter 2024 earnings call.

Simon Khalaf: I will first briefly discuss our Q3 results at a high level, followed by the progress we're making in our business to help transform payments, and last, address the Q4 reduction in growth expectations.

Simon: Marquera's business is on solid ground, and our fundamentals are strong.

We have lapped the cash app renewal, and as a result, the third quarter's net revenue, gross profit, and adjusted EBITDA now give a more accurate view of our business trajectory as they demonstrated positive year-over-year gains.

Simon: Total processing volume, or TPV, was $74 billion in the third quarter, a 30% increase compared to the same quarter of 2023.

Simon: Our net revenue of $128 million in the quarter increased 18% year-over-year.

Simon: Gross profit was $90 million in the quarter, a growth of 24% versus the comparable quarter of 2023.

Simon: Our non-gap-adjusted operating expenses were $81 million, representing a 9% increase year-over-year, significantly below our gross profit growth rate.

Simon: This resulted in an adjusted EBITDA of $9 million in the quarter.

Simon: Now let me shift to talk about where we are in the transformation of payments.

Simon: The modernization of payments started more than a decade ago on the acquiring side, but has gained momentum on the more complex issuer processing side in the last five years.

Despite the great progress we made, this transformation is still in its early stages.

Simon: and Marketa currently accounts for only about 2% of the issuer processing volume in the markets we operate.

Simon: There is a long-term secular shift in financial services. The days are numbered for the status quo, as consumers and businesses want modern financial products.

Simon: We're driving the shift and have the scale and track record as a trusted ally to innovators.

Simon: But there is more we can do to accelerate this transition and reduce the overall time to value.

Simon: We recently launched Portfolio Migration.

Simon: This list-and-shift solution allows companies to migrate portfolios from competitor processors to Marketa's modern platform, allowing customers the best of both worlds.

Simon: A smooth transition combined with the ability to benefit from the increased capabilities our platform enables.

Simon: This capability includes two main components, an automated migration tool that transforms and aligns CART program data from the previous system to Marketta's platform, as well as operational processes to ensure a smooth transition.

Simon: We believe this capability can accelerate the shift to our platform and reduce time to value.

Simon: In fact, we recently completed the successful migration of millions of Klarna cards across Sweden, Germany, and the UK in October after starting the project earlier this year.

Simon: The transition provided Klarna with greater resilience and stability, meeting Klarna's needs ahead of the holiday season.

Simon: Millions of PLARNA users now have the best technology, powering their cards, and enjoy rich functionality.

Simon: This success serves as a strong proof point when offering similar migration services to other customers, showcasing a modern and seamless solution.

Simon: We're also delivering ways to accelerate the launch of new card programs, as exemplified by the release of our UX Toolkit.

Simon: This capability allows customers to create branded front-end experiences using a comprehensive set of pre-built UI components optimized for Marketa's APIs.

Simon: It enabled customers to build a Marketa-powered debit and credit program with fewer development resources.

Simon: This is particularly valuable in new banking, where customers want a straightforward way to manage their money, and in better finance, where customers want payments to blend into their existing experiences and drive further engagement.

Simon: We already have four customers adopting the UX toolkit, integrating the features into their own existing products, and the feedback has been extremely positive.

Simon: Also, in keeping with the current regulatory climate, the toolkit was done in a compliance-forwarded manner as these templates have been vetted by banks with specific regulations in mind.

Simon: We're also enabling the shift to modern card issuing by leveraging our unique scale and expertise, especially in Buy Now, Pay Later or BNPL.

Simon: Last week, we announced Marketaflux, a new solution that revolutionizes how BNPL payment options can be delivered inside payment apps and wallets, surfacing them

Simon: when needed within the payment flow.

Simon: Many years ago, Marketa expanded the addressable market for BNPL.

Simon: with the use of single-use virtual cards.

Simon: Eliminating the need for providers to directly connect with merchants.

Simon: in order to bring the NPL to the point of sale.

Simon: With Marketaflex, we plan to expand BMPL's distribution even further by giving consumers access to personalized BMPL options inside of their payment apps of choice.

Simon: We're excited about the participation of Quarna, UpFirm, and Branch in the next innovation in the BMPL landscape.

Simon: Together, these relationships are helping us create an experience that expands the NPL distribution and enhances the overall payment experience.

Simon: We plan to roll out Marketaflex in mid-2025. In the meantime, we will gather additional participation from customers and partners to participate in this new approach to scaling BMPL.

Speaker Change: With all this great progress, why is our guidance for Q4 softer than expected?

Simon: Last year, the regulatory environment changed amongst the smaller banks that support many of our customers' programs.

Simon: As a company, we anticipated this change and invested in program management in general and compliance services in particular.

Simon: We believe that these investments have positioned us well in the medium and long term and increased the moat around our platform, especially in embedded finance.

Simon: However, we underestimated the increased operational burden these changes made on both Marquette's and the bank's onboarding and compliance teams.

Simon: The incremental scrutiny and rigor translated into delays in launching new programs.

Simon: These delays have also been aggravated by the increased demand from new bookings in 2023 and the first half of 2024.

Simon: On average, the time to launch new programs grew 30% to 40% from 2023, and we expect that increase to remain for at least two additional quarters.

Simon: as we and our bank partners become more agile in launching programs in this new environment.

Simon: Given the stand-in ramp time for programs in our industry, these delays will cause volume and gross profit to be pushed out a few months.

Simon: Now, with a more complete understanding of the implications, we're taking a more holistic approach to ramping the programs we have already signed.

Simon: We are also signing up new banks to add capacity and open up new choices for our customers while making our processes standardized across all banks we support.

Simon: We are confident these changes will give us the agility we need. However, it will take a few months to completely solve the problem and drain the backlog that has been built up.

Simon: We view the headwinds from the more challenging bank environment as short-term, merely slowing down our progress rather than a change in the trajectory of our business, nor impacting our path to profitability.

Simon: In fact, we remain confident in our strategy, business trajectory, and execution.

Simon: We've been a large contributor to transformation in the payments industry and a trusted ally to our customers who seek an engaging and compliant customer experience. We've done it with an eye on the horizon and a nose to the ground.

Simon: Although the current banking environments have shifted the curve out, the fundamentals of our business are strong, our pipeline continues to grow, and we are confident in our ability to demonstrate strong, long-term, profitable growth.

Speaker Change: With that, I'll pass it on to Mike.

Mike Milotich: Thank you Simon and good afternoon everyone. Our financial results in Q3 better reflect the growth trajectory of the business now that we have lapped the cash app renewal.

Mike Milotich: Strong TBV growth continues to be broad-based across several use cases and geographies, fueling our gross profit growth.

Simon: Nevertheless, TPV and gross profit growth were a little lower than we expected due to a smaller contribution from the launching of new programs, which I will cover in detail in a few minutes.

Simon: Our path to profitability, however, remains on track as adjusted EBITDA was $2-3 million better than expected due to continued execution of efficiency and optimization initiatives.

Simon: Q3 TPB was $74 billion, a year-over-year increase of 30%.

Speaker Change: Non-block TBV grew more than 15 points faster than block TBV growth due to strength across a large number of customers and use cases.

Speaker Change: Our top 10 non-block customers grew over 30% and our remaining non-block customers grew over 50% year over year.

Speaker Change: Financial services, lending, including Buy Now Pay Later, and expense management all grew at roughly the same rate for the third quarter in a row, slightly faster than the overall company.

Simon: Financial Services continues to deliver strong growth despite being by far our largest vertical.

Simon: The law continues to flourish, and our newer neobanking and accelerated wage access customers are expanding rapidly, growing well over 100%, and are now contributing more than 10% of total company TPV.

Simon: Lending, including Buy Now Pay Later, continues to be aided by the adoption of our BNPL customers Pantywear card solutions, as well as customers utilizing our platform in support of SMB lending solutions.

Simon: Expense management growth has been very steady each of the last three quarters with several of our top customers remaining maintaining robust growth fueled by new users.

Simon: The growth of on-demand delivery, our most mature use case, slowed into the single digits this quarter.

Simon: Q3 net revenue was $128 million, growing 18% year-over-year.

Simon: Net revenue growth is almost 13 points lower than TPV growth, a larger than typical gap, primarily for two reasons.

Simon: First, strong TPB growth in recent quarters among many of our Powered by Marketa customers has shifted the mix of our business.

Simon: The Powered By revenue take rate is much lower than Managed By as a result of there being minimal cost of revenue, which contributed a mid-single-digit impact when comparing revenue and TPV growth.

Simon: This impact is less significant when comparing gross profit take rates for the powered by and managed by business.

Simon: Second, the renegotiated platform partner agreement that went into effect in Q1 2024 drove a low to mid single-digit headwind on a year-over-year basis.

Simon: It is important to note that this change only impacts revenue, not gross profit, as a result of the new Cash App Revenue presentation and will lap in Q1 2025.

Simon: Block net revenue concentration was 47% in Q3, consistent with last quarter. Non-block revenue growth was over 10 parts higher than block net revenue growth.

Simon: Our net revenue take rate of 17 basis points was slightly lower than last quarter, primarily driven by business mix from the increasing TPV contribution of Powered By and a few of our largest Managed By customers.

Simon: Q3 gross profit was $90 million, resulting in a 24% year-over-year growth and a 70% gross profit margin.

Simon: Gross profit growth was approximately two points lower than expected, as a result of lower contribution from new programs in the quarter. There are two reasons for this.

Simon: First, 15 programs we expected to launch in the quarter were delayed by an average of 70 days.

Simon: We were less efficient in working with our bank partners to launch new programs, which we attribute to the increased regulatory scrutiny over the last few quarters on the banking industry, particularly the smaller banks supporting fintech and embedded finance.

Simon: Although we anticipated challenges as a result of the increased scrutiny, we significantly underestimated the impact of constrained resources and evolving processes.

Simon: Now we have a backlog of programs to launch. Unfortunately, as the backlog builds and the ramp of programs is shifted out in time, there are bigger implications for Q4 and 2025, which I will cover in more detail in a few minutes.

Simon: Second, our new programs that have already launched in aggregate are not performing as expected.

Simon: Because we serve many innovators and disruptors, Marquetta has always viewed launch cohorts as a diversified portfolio of programs, with customers achieving varying levels of success.

Simon: Given the small sample size of new programs in 2024 as a result of the delays, the portfolio lacks diversification and therefore it may be a little early to evaluate.

Simon: The cause of gross profit underperformance can happen for several reasons, including changes to the customer's level of investment or resource allocation, the value proposition needing refinement, or higher cost of revenue than projected.

Simon: Our gross profit take rate was 12 basis points, one higher than last quarter, driven by higher incentives in Q3.

Simon: This is the result of the annual reset of incentives in Q2 based on the contract years.

Simon: Q3 adjusted operating expenses were lower than expected at $81 million, an increase of 9% versus last year.

Simon: To fully benefit from our scale, we are focused in our hiring, continue to utilize multiple geographic locations to find the best talent, and are executing our efficiency and cost optimization initiatives well.

Simon: All of these scale benefits help deliver higher than expected Q3 Adjusted EBITDA of $9 million, resulting in a margin of 7%.

Simon: Interest income was $14 million.

Simon: Q3 gap net loss was $29 million.

Simon: In Q3, we repurchased over 9 million shares at an average price of $5.15 for $49 million. We ended the quarter with $1.1 billion of cash and short-term investments.

Simon: Now let me walk through our latest Outlook for Q4.

Simon: We expect Q4 net revenue growth to be between 10% and 12%, and Q4 gross profit growth to be between 13% and 15%, a 6 and 9 point reduction respectively, compared to what we shared in early August.

Simon: The change in our expectations is primarily driven by two factors, both of which stem, to some degree, from the heightened regulatory environment from our bank partners.

Simon: First, we now expect significantly fewer new programs will launch and ramp up in the second half of the year, lowering gross profit growth by approximately six points.

Simon: We were not quick enough with solutions and new processes for our bank partners and they are more focused on maintaining current programs in the heightened regulatory environment than launching new programs.

Simon: In some cases, this environment also delays our customers' launch plans.

Simon: Now that we have a backlog of programs to launch, it will take time to work through it.

Simon: Delays of a few months pushes launches into Q4 and the first half of 2025.

Simon: Because of the ramped trajectory of TPV in the first year of a program, a few months delay meaningfully impacts Q4.

Simon: The impact is larger on gross profit than revenue, since newer programs with subscale volume tend to have high gross margins until our customers work through the initial volume tiers in our contracts.

Speaker Change: Why does this change in assumptions seem so sudden?

Speaker Change: We have been very aware of the scrutiny and working through it with our bank partners, investing significantly more in our compliance efforts since the start of this year to raise our program management standards ahead of the rising tide.

Speaker Change: However, in the past two to three months, it has become clear we greatly underestimated the magnitude and time horizon for all parties to adapt to the new standards.

Simon: We are actively executing the solution for this challenge, working closely with existing bank partners to optimize our processes to improve the efficiency of program approval and onboarding.

Simon: In addition, we plan to onboard at least two additional bank partners to increase our bank supply to meet our growing demand.

Simon: The second factor is a few highly sophisticated, long-term FinTech customers are moving quickly to take ownership of more of the program components in this heightened environment, lowering gross profit growth by two to three points.

Simon: We have two customers quickly shifting their resources to take on more program management responsibilities, one customer bringing more RISC services in-house, and three customers connecting their platforms directly to their end users to reduce their reliance on card usage.

Simon: All of these actions reduce our volume or our take rate.

Simon: We do not believe these types of customer actions will become broad-based, because very few want to prioritize this type of work or have the scale and sophistication to execute in a way that is accretive to their business.

Simon: Outside of these two factors, the business is mostly on the trajectory we expected several months ago.

Simon: Based on our Q4 outlook, we expect full year 2024 net revenue growth to be approximately negative 26 and full year 2024 gross profit growth to be approximately 6%.

Simon: https://www.youtube.com.actionkhalaf.com

Simon: Despite some setbacks to gross profit growth, we continue to execute cost optimization and efficiency initiatives to drive higher adjusted EBITDA, as shown in the Q3 outperformance. We now expect our Q4 adjusted operating expense growth to be in the high single digits

Simon: with sufficient investment in resources, specific capabilities, and platform resiliency to best serve our customers and drive future growth.

Simon: Therefore, we expect our Q4 adjusted EBITDA margin to be 5-7%, only one point lower than the expectations shared last quarter, as a result of better operating discipline.

Simon: Based on this Q4 outlook, we expect full year 2024 adjusted EBITDA margin of approximately 5%.

Simon: While it is too early to discuss our 2025 expectations in detail, at this point we believe Q4 2024 is a good indicator for 2025.

Simon: Gross profit growth in 2025 could be similar to Q4 2024 as we solve for new program launch delays, pushing the ramp of programs to later in 2025.

Simon: Also similar to Q4, our expectations for 2025 Adjusted EBITDA are not changing from what we shared at our 2023 Investor Day.

Simon: Being ahead of schedule on our expense optimization work should enable us to deliver adjusted EBITDA of approximately $50 million in 2025 and remain on track to exit 2026 GAAP profitable.

Simon: We believe these challenges with new programs are a short-term issue impacting the next several quarters as a result of shifting out the new program ramp curve.

Simon: rather than a structural change in our business that impacts the growth trajectory beyond 2025.

Simon: To wrap up, we had a strong quarter, delivering robust gross profit growth combined with an improving Adjusted EBITDA trajectory.

Simon: We are beginning to realize the benefits of our scale, both in generating profitable growth, but also in the opportunities we are discussing with embedded finance prospects, looking for a highly capable, multinational partner to support several use cases.

Simon: Although our gross profit growth in the coming quarters will be lower than our previous expectations, we are still a market-leading platform generating mid-teens growth with a rapidly rising adjusted EBITDA. Our underlying business remains strong and our differentiation in the market remains clear.

Simon: The delays in launching new programs is a small setback on a long, prosperous journey of modernization of issuer processing that Marketa is well positioned to lead.

Simon: I will now turn it over to the operator for Q&A.

Simon: Thank you.

Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session.

Speaker Change: If you would like to ask a question, please press star and 1 on your telephone keypad.

Speaker Change: A confirmation tone will indicate your line is in the question queue.

Speaker Change: You may press star and 2 if you would like to remove your question from the queue.

Speaker Change: For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Ladies and gentlemen, we request you to restrict to one question and one follow-up question per participant.

Speaker Change: The first question comes from the line of Ramsey LSL from Barclays, please go ahead.

Ramsey LSL: Hi, thank you for taking my question this evening. Can you comment on your visibility at this point given everything that's going on in terms of these regulatory driven sort of changes?

Ramsey LSL: Is, you know, are you confident that you're seeing sort of a bottoming out of the sort of pain here? Or could we get to next quarter and see that things have deteriorated further? And I'm also just wondering whether there's a risk that some bookings may get terminated if the implementation timeline stretches out for too long.

Speaker Change: Now, let me take that, Ramsey, and then pass it over to Mike.

Speaker Change: So what I would say is we do have the visibility because we have bottomed out.

Speaker Change: And I say that for multiple reasons.

Ramsey LSL: is that we have anticipated the changes. What we have not anticipated is the impact on the onboarding process with our banks.

Ramsey LSL: So, just to give you specific examples, it's not that I say the rules have changed, it's more the third-party oversight and the scrutiny upon launching a program that have changed.

Ramsey LSL: So, as an example, as we actually change something in the program, it goes back to the top of the queue versus being done in parallel.

Ramsey LSL: So these are procedural changes versus, I'd say, material changes.

Ramsey LSL: So the regulators have a tough job, but I do believe we are over the hump when it comes to what do we need to fix.

Speaker Change: in order for us and our banking partners

Speaker Change: to go back to, I'd say, the ordinary times to get a program out.

Speaker Change: It will take time to drain the backlog.

Speaker Change: because it's not that our demand went down, it actually went up. So we have some backlog that we have to drain.

Speaker Change: And in terms of your questions about...

Speaker Change: Will people run out of patience as they are in the queue? We don't expect that. I mean, both entities, like, this is not an instant in which both parties are not committed to the partnership. There's a lot of work that goes into it from development to onboarding to risk management. So we're pretty quite committed, so are our customers. And we have, I mean, they all understand the environment. We're not the only entity impacted by it. So we're working with them. And on the contrary, they have been extremely supportive. And they continue to be excited about the programs that they want to launch. Mike, anything you'd like to add to? Yeah, just maybe I'll just give some color on.

Mike Milotich: just the specifics on some of the delays, Ramsey. So, if you look at the first few months of 2024, the regulatory scrutiny had clearly ratcheted up with more than 10 consent orders affecting the banks in our space.

Mike Milotich: And so what we saw was an initial spike in the time to launch that was more than 2x the average in 2023. So, 2023 onboarding and delivery was typically around 150 days, roughly, and in Q1-Q2 that rose to over 300 days.

Mike Milotich: This was the...

Mike Milotich: And so the time still remained over 200 days when it had previously been about 150 days. So

Speaker Change: So that just gives you a little more color on sort of the magnitude of what's happening.

Speaker Change: And to just address your second question in terms of visibility, so we had 15 programs that were delayed on average of 70 days, but when you break that down into components, so five of those 15 actually did launch in Q3, but just much later than expected.

Speaker Change: Nine programs are now expected to launch in Q4, so a little more than half are now being pushed into Q4, and then one is slipping into Q1 of 2025. So, you know, we have pretty good visibility now that we've started to implement some of the solutions to address these challenges.

Speaker Change: So we, you know, we, you know, there, of course, there's still some unknowns, but for the most part, we feel good about, you know, the projections we're sharing in terms of our outlook.

Speaker Change: Okay, thank you very much for that and just a quick follow-up. You also called out some new programs that that launched that are not performing as expected. Can you give us a little more color there and also maybe comment on the degree to which

Speaker Change: you might be able to change the trajectory there. You mentioned things like refining the value proposition or maybe investment levels of your customers. Is it sort of like now that those cohorts are performing as they are, it's just that's the way it's going to be, or could you see a change as time passes in terms of performance?

Speaker Change: Yeah, so there's definitely ways to impact the trajectory, as I mentioned in sort of my prepared remarks.

Speaker Change: The key is when we're looking at new program launches, we look at them as a portfolio. And we look at them in aggregate because of the nature of the types of customers we serve.

Speaker Change: We're a little bit of a hits-driven business where we'll have a few programs within a new launch cohort that experience a lot of success.

Speaker Change: and you have some customers whose value proposition doesn't quite hit the mark and needs to be adjusted. So we are, I guess.

Speaker Change: We typically see this type of outcomes and then we work with the customers who are not experiencing as much success to implement changes, help them refine their value proposition and get those changes through the bank.

Speaker Change: I would say it's not...

Speaker Change: that unusual. I think what

Speaker Change: is a little bit different, is because of all the program delays, the...

Speaker Change: Michael Milotich, Stacey Finerman

Speaker Change: Thank you.

Stacey Finerman: The next question is from the line of Darren Peller from Wolf Research. Please go ahead.

Darren Peller: Hey guys, thanks. Just a couple of follow-ups on this topic. I mean, I guess number one, you know, in terms of your confidence level that your current existing customers

Darren Peller: that haven't been yet impacted by this, shouldn't be impacted by this going forward. Can you just help us understand what gives you any conviction around that?

Speaker Change: and then I guess it's great to hear the visibility on the 15 that really was helpful actually in terms of the onboarding timing but maybe just help us understand a little bit more about what what gives you confidence that you know on ongoing or other new customers don't change their mind about the operating business

Speaker Change: maybe just a quick follow-on would be maybe help us if you could help us with anything around verticals or where this fits into your business a little more I understand it's

Speaker Change: You know, it's partners with smaller banks, obviously, that are acting as sponsor banks. But any more color on where this fits in terms of verticals or anything else would be helpful. Thanks, guys.

Speaker Change: Thank you, Darren. Let me take the first question and then I'll hand it over to Mike. So,

Speaker Change: I'd say in terms of our existing customers...

Speaker Change: We at Marquera have taken a lot of steps early on before the increase in the regulatory scrutiny and our consent orders in order to review all our programs and the procedures that put in place. I would say dating to programs that have launched

Speaker Change: for two years.

Speaker Change: So we're pretty comfortable that whatever is out there and launched is pretty good in terms of being able to sustain more rigor in the regulatory system. It's almost we've done the parking lot exercise. We looked at everybody and said, okay, no, these programs are solid.

Speaker Change: And then whenever we have questions, we actually put our partners through the test.

Speaker Change: So, feel comfortable about that. Now, in terms of your second question, as in like, hey, why are you confident that customers are not going to drop off, right, if the time it takes to launch these programs has increased?

Speaker Change: So, number one, we stayed in touch.

Speaker Change: with our customers.

Speaker Change: and we've worked, I'd say, in lots of steps with them on all the changes that are necessary, number one.

Speaker Change: Number two is...

Speaker Change: We've spoken to them about reducing the number of changes, as in reduce the scope.

Speaker Change: right, and

Speaker Change: don't iterate as much at the beginning, so we don't put them back at the end of the queue. And there have been responses to that.

Speaker Change: And the third thing we've done is we moved some of our resources to actually consult with our customers. I hate to use the word get it right the first time, but it's almost that, as in, hey, let's…

Speaker Change: Let's use the experience we have from the 400 programs that have launched.

Speaker Change: and recognize that that's going to be the construct.

Speaker Change: that is going to be working versus being extra cute to actually win a few points with consumer here and there. So probably the word discipline is what I would use.

Speaker Change: early on in the cycle but I would be extremely surprised if we have follow-up given how invested our customers are in the solutions that they're about to launch.

Speaker Change: Yeah, one thing I'd add to that, Darren, is just when you...

Speaker Change: If you look back on, since we started really meaningfully increasing our bookings, you know, over the last year and a half to two years.

Speaker Change: You know, we've talked about that more than half of those tend to be with existing customers of ours who are doing new programs. So they're

Speaker Change: a pretty good understanding from from everyone involved that this is

Speaker Change: not a Marquette issue or specific to, you know, the bank partner we may be working with, but this is a much broader change that's happening in the industry, especially if they speak to other banks or, you know, other people they know in the industry. It's pretty broad-based, and so we're not seeing...

Speaker Change: you know, customers questioning, you know, why this is happening. I mean, everyone's sort of feeling the impacts.

Speaker Change: In terms of your last question about is it certain verticals, it isn't. This is very, very broad-based. It's more of a kind of foundational change in how we go through the onboarding process, and it's really affecting all use cases. That said, just to reinforce something Simon mentioned, you know, we are trying to encourage customers to stick

Speaker Change: to constructs that we know have been pre-approved and moved through, so moved previous programs through. So, you know, limiting your changes and trying to get it live, and then going from there to maybe refine the value prop over time.

Darren Peller: Yeah, all right. I was going to just kind of add on to that specific topic, Mike, you mentioned about sticking to the construct, but I mean, have you guys, I'm assuming you guys have been able to talk, touch base with the underlying regulators, just to see and get a feel for if there's any more material incremental changes that are going to be required.

Speaker Change: We're always, we're always talking to everybody in the ecosystem including the regulatory bodies. Like I said, they have a tough job.

Darren Peller: But I wouldn't say that, like...

Darren Peller: This is...

Speaker Change: Like, hey, incrementalism.

Speaker Change: It is more that most of the reactions have been to things that have happened in the past.

Speaker Change: and not by Marquera, but we live in an ecosystem in which a bad apple ruins the whole ecosystem. So as an industry, right, what happened is the regulators came strong against some of the underlying banks.

Speaker Change: and there is an overall increase in third party oversight. But we don't expect that environment to change because there isn't anything I would say that is...

Speaker Change: that is anything but.

Speaker Change: the banks and ourselves, or the industry in general, doing what they're supposed to do. The other thing, what we've done, Darren, is I'd say at the beginning of this year, we've moved bank vetting into early stages in our pipeline. So we do not go into contracting with anyone before the banks have vetted the solution.

Speaker Change: So, that is a change that we've done in order to increase, I'd say, the chances of anything we sign to go live.

Speaker Change: So, that also increases our confidence, and I think that helps in effectively weeding out the solutions that are not going to make it through the bank, so that we become more efficient in handling delivery.

Speaker Change: Thank you.

Speaker Change: The next question is from the line of Tien Sing Hoang from J.P. Morgan. Please go ahead.

Speaker Change: I thank you for going through all of this and I appreciate the you're sticking with the 25 EBITDA outlook. So I just want to want to clarify here that with all the work that you're doing to remedy the situation, I ought to presume there'd be additional costs or maybe some deleveraging there. Am I misunderstanding that? Just can you walk us through what you're doing on the remedy side and the impact on the P&L and why you're confident in protecting EBITDA?

Speaker Change: Thank you, Sinjan. I would say the cost has already been incurred because as a company, and I think we spoke about it multiple times, Sinjan, we started the investment in compliance.

Speaker Change: early on.

Speaker Change: It is the largest investment we've made, tailing the 23 and going into 24.

Speaker Change: But also, we've, we've...

Speaker Change: We've automated a lot of our processes, number one, and we've decided to onboard a lot of marketing outside the United States as well. In Poland, when it comes to risk management and compliance operations.

Speaker Change: and in Toronto on the development and prop tech side. So, we've taken all these steps.

Speaker Change: The things that are...

Speaker Change: that we could not actually predict was whether the banks themselves

Speaker Change: have to increase their OPEX in order to meet those changes. And we're comfortable, our compliance team is comfortable with the investment the banks have done themselves.

Speaker Change: in order to meet this new reality.

Speaker Change: Now, to answer your kind of, what are we doing about it, right? I'd say the number one thing we're doing is...

Speaker Change: becoming more efficient without existing banks.

Speaker Change: Sticking with existing constructs, looking at use cases that have worked, and reducing the tweaks that actually don't matter, so that they don't go through the process. We are adding a couple more banks to help.

Speaker Change: to help with the supply side.

Speaker Change: And last but not least...

Speaker Change: We've laced

Speaker Change: some of our experts in the field to consult with our customers to get it right the first time. I do believe all of these steps.

Speaker Change: give us the confidence that not only will we be able to be differentiated and increase the moat on our solution in the medium and long term, but we'll be able to help us drain the backlog versus continuously add more deals to the backlog.

Speaker Change: Thank you. Thank you.

Speaker Change: And just to add maybe a couple of details, Tingen, normally we wouldn't comment a lot on 2025 at this time, but we're being more transparent based on the circumstances. You know, at this point, our view of 2025 gross profit from programs that launched prior to 2024

Speaker Change: is not much different than what we thought a year ago at Investor Day. So the change that we're seeing on 2025 is really centered around new programs that we're launching in 2024.

Speaker Change: and the way we look at that, just so you have a sense, is there's a typical ramp of TPV.

Speaker Change: that we assume based on historical data. So we've looked at, you know, literally over a hundred programs that we've launched. We remove outliers, both good and bad.

Speaker Change: and you use that and you sort of see a trajectory of how a program grows over time.

Speaker Change: and it's that typical ramp that we use to project our business.

Speaker Change: As you can imagine, in the first couple of months, the volume is pretty light as the program gets started. So in that first six months, 90% of the volume for that program happens in months four to six. So the first couple of months are pretty slow. Months four to six, things start to pick up.

Speaker Change: And then from month 7 to 12, the volumes are 6x larger than the first 6 months.

Speaker Change: So, the curve starts ramping very steep and then months 13 to 18 is then 3x larger than months 7 to 12.

Speaker Change: So...

Speaker Change: When you start to look at that curve what you

Speaker Change: You start to kind of understand why I want to show that detail. If you just start shifting that a few months, it has...

Speaker Change: pretty big implications into our ability to realize revenue and gross profit. And that's what is happening from a timing perspective. So that's why we're confident that by 2026, we should be back on the pace that we expected from our investor day, we just need a little time to work through these challenges.

Speaker Change: and solve for the backlog. But that's kind of where we are from a gross profit perspective. And then because we've made so much progress on the expense side, we still believe that we'll be able to meet the EBITDA projections that we signed up for of about $50 million.

Speaker Change: Yeah, well one thing I'll add, Tingen, is that we've been tracking this curve

Speaker Change: So I think our confidence is pretty high that that's what programs on a cohort-by-cohort basis will look like.

Speaker Change: Okay, now that's encouraging. Thanks for going through that.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Timothy Chiodo from UBS. Please go ahead.

Timothy Chiodo: Great. Thank you for taking the question. So, I just want to recap. So, this question is for Mike. So, it sounds like there's three factors. The first is the timeline push out of new programs. The second one is some of the changes with a little bit of in-house or in-sourcing, if you will, from some of the more sophisticated customers. And then the third, and it sounds like maybe a lesser factor, is the early performance of some of the more recently launched programs.

Speaker Change: I want to, I believe that's the stack ranked order I would like to...

Timothy Chiodo: And then I was hoping, Mike, if you could maybe just dig in a little bit more around the sophisticated customers, the types of customers they are.

Timothy Chiodo: You said some of them are doing a little bit more of the PM in-house, some of them are doing a little bit more risk in-house. Maybe you could just dig into that more.

Mike Milotich: Sure, so just to confirm what you said, Tim, so yes, I would say it's more...

Timothy Chiodo: two factors, so it's the

Timothy Chiodo: It's the timeline of these new programs, and then it's...

Speaker Change: some of our sophisticated FinTech customers, you know, doing more things in-house. I would say the early performance is kind of part of the new program impact and it's quite small. It's really not that significant. So I would say it's really two primary factors.

Timothy Chiodo: and to give you a little more color on what we're seeing for our customers who are bringing more things in-house.

Speaker Change: two customers who are taking over the bank relationship.

Timothy Chiodo: So although we're going to still provide some program management capabilities for them and services, they are going to manage the bank relationship directly. So that's a type of change. We have another customer who's bringing more risk services in-house based on a homegrown solution. So this is a large, sophisticated customer who has been building this for some time and is pulling this in.

Timothy Chiodo: And then we also have three customers where they're connecting their platform directly to their end users to reduce their reliance on card. So, as you know, if you think about what we do in Buy Now, Pay Later, on-demand delivery, AP automation,

Timothy Chiodo: In all those use cases, those customers can execute their business without issuing cards.

Timothy Chiodo: What we've allowed them to do is dramatically scale much faster. But in this case, in this environment, there are three customers that have done some direct connections, and we're going to lose that volume, and that's what's contributing to about two to three points of loss.

Timothy Chiodo: lower growth in Q4 than we had previously expected.

Timothy Chiodo: And again, as I mentioned before, this is something that, I would say, individually, events like this have happened in the past and are part of our business.

Timothy Chiodo: What's different here is that there's a concentration of this activity in a short period of time that's making it impactful. So none of these things in isolation I would say would be events.

Timothy Chiodo: But the fact that they're all happening at once is what makes it more impactful, which is why we attributed at least to some degree to the overall environment that we're going through, that we're seeing customers move.

Timothy Chiodo: sort of quickly and in a timeframe that we haven't typically experienced, and that's why, you know, we're, you know, we're having to sort of adjust our expectations in a relatively short order of time.

Timothy Chiodo: Thank you, Mike. And then a more brief one. So Visa said on their earnings call around Visa Flexible Credential, and I quote, they said they have, we have hundreds of issuers in the pipeline and several launches planned for 2025 for the new Visa Flexible Credential. Clearly, you've been one of the first to be certified to work with Visa Flex Credential. Is it safe to assume that of those hundreds that they mentioned that Marquetta should be working with some portion of them or any additional context you could provide there?

Speaker Change: Yeah, uh...

Speaker Change: Thank you for the questions. So, yes, we were the first.

Speaker Change: And I say that...

Speaker Change: We are in the midst of a launch, as in like going live, and we expect that actually to happen either tomorrow or Wednesday. And it starts into the ramp phase on the 15th of November. So the reception, as we said last time, has been great.

Speaker Change: and we're very comfortable with it. So, yes, it has increased the demand on our services both in the U.S. and the U.K. and the EU.

Speaker Change: Thank you. The next question is from the line of Sanjay Sakkarani from KBW. Please go ahead.

Speaker Change: Alright.

Sanjay Sakkarani: Thanks. I guess, Mike, you mentioned, or Simon did, that what you were seeing is not dissimilar to what others have seen in the industry. I mean, have you guys validated that? Have your competitors also seen similar product launch delays?

Sanjay Sakkarani: Good question. Actually, as a team, we were at Money2020 last week, which is the conference for new financial services. And I'd say that the number one thing that was discussed

Sanjay Sakkarani: was how everyone is now taking compliance and, in general, in regulatory compliance.

Sanjay Sakkarani: Seriously, and everybody's talking about the delays.

Sanjay Sakkarani: but they're also talking about the flight.

Sanjay Sakkarani: to quality, which is they're coming to Marketa because we were the entity that has invested early on.

Sanjay Sakkarani: in the cycle, and also we heard a lot of folks that thought that they could use bass players.

Speaker Change: Thank you. Thank you.

Sanjay Sakkarani: kind of like an alternative to Marketa, that actually has disappeared because a lot of folks mentioned that they're seeing almost these solutions fizzle out in terms of the ability to take on scaled programs. So, yes, we're not unique into that, into this environment, but I do believe we had a head start in compliance.

Sanjay Sakkarani: and we will get over this hump in terms of the operational burden that ourselves and a couple of our bank partners have faced.

Speaker Change: Yes, Sanjay, we also have several programs in our pipeline.

Sanjay Sakkarani: for people who have been notified that they're going to have to leave their bank, that the bank is even exiting the space, or...

Sanjay Sakkarani: or terminating their partnership with whatever platform they're on. So there is, I guess, several data points out there that suggest that this is not a Marquette-specific issue.

Speaker Change: Okay, just a follow-up question Mike you talked about the fourth quarter run rate revenue gross profit being good proxy for 2025

Sanjay Sakkarani: I guess, is that a worst-case scenario, or could that be ratcheted down? And I guess, like, when we think about the deferral, let's just say it's 60 days...

Speaker Change: Like, does that mean that you see a step up in the second half of next year under that paradigm or is it more even? I'm sorry, I know you're not giving 2025 guidance, but just understanding sort of the cadence of that.

Speaker Change: Yeah, no, it's fair enough. I think that, yeah, we wanted to give, you know, some indication just as we're resetting expectations, just to be transparent with all of you. So I think it all depends, Sanjay, on how quickly we work through the backlog. So I think we feel good about the solutions we're starting to implement, and we're seeing progress. So we kind of feel like we're maybe over the hump. We're not past it, but we're kind of over the hump.

Speaker Change: The question is, then, how quickly can we work through the backlog as...

Speaker Change: We also had programs that were expected to launch in Q4 that are now kind of...

Speaker Change: you know, in the queue, if you will, so it...

Speaker Change: It all depends how quick, how long they stack up, I think will determine.

Speaker Change: what the quarterly trajectory looks like for 2025. And that's something that we'll obviously have a much better idea of in late February when we talk again and we'll be able to give a quarterly cadence at that point.

Speaker Change: Thank you. The next question comes from the line of Andrew Schmidt from Citi. Please go ahead.

Speaker Change: Thank you.

Andrew Schmidt: Hi Simon. Hi Mike. Thanks for taking my questions and really appreciate all the detail here.

Andrew Schmidt: It makes sense in terms of the increased scrutiny, the elongated time frames, but I guess just in terms of changes that are required on the Marketa platform, could you comment whether there is anything that needs to be changed? Obviously, we've heard things like...

Speaker Change: You know more more detail or transparency at the sub FBO level things like that. Nothing that's you know significant But I'm just curious as a result of this if there are also changes to the platform As a result in addition to kind of some of the just the process changes you're making. Thank you so much

Speaker Change: Thank you Andrew for the question. I mean the short answer is nothing that our compliance team has not started working on. I mean we do, there's always room for improvement in everything we do, especially when it comes to the automation side, the reporting, consolidated dashboards.

Speaker Change: But conceptually, it's not that the requirements have changed. It's more, do we increase doing something just to increase the visibility?

Speaker Change: that our compliance and regulatory teams have. Just to give you an example, the team is building a great dashboard that can operate in near real-time on the compliance side, so that they are actually more in tune with some of the programs that are launching early. But I guess the short answer is, there is nothing that we are changing that we did not know we had to change before, because of the maturity and the scale at which some of our customers are operating at now.

Speaker Change: Got it. Thank you for that, Simon.

Speaker Change: And then maybe I could ask on the new sales environment, obviously the focus here is working through the backlog, but have you seen, you know, hesitancy from new candidates in the pipeline given just what's going on in the environment? And then just...

Speaker Change: More broadly speaking, as you think about just draining the backlog,

Speaker Change: Do you shift some resources of new sales to implementation? I'm just curious just overall on the new sales environment. Thank you very much. It's a great question. It's a great question. We have moved resources.

Speaker Change: to help.

Speaker Change: but I'd say what we've done the most of is having our delivery team use their expertise and hard expertise to help our customer

Speaker Change: get it right the first time. I'd say that's the first step we've done.

Speaker Change: We're also looking at a mechanism to decide how do you prioritize

Speaker Change: uh, things going through the pipeline, so it's not a first in first out, uh, also. Uh, the other thing we've done is we've taken on some of the vetting ourselves.

Speaker Change: So, to help our bank partners. Now, in terms of, have we kind of like, does the top of the pipeline as the funnel, is it impacted as in, hey, because of the regulatory scrutiny, our customers shine away from this?

Speaker Change: I'd say it's quite the contrary, and our pipeline continues to grow despite the bookings increase. And I can only point to growth in our pipeline, specifically from embedded finance customers.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Andrew Bouch from Wells Fargo. Please go ahead.

Andrew Bouch: Hey, thanks for taking my question. So if we think about the

Andrew Bouch: six-point headwind to gross profit growth in the fourth quarter. Is it fair to assume that the existing, call it, same-store sales estimate within that is unchanged from from where we were just three months ago? Meaning, you know, is your macro assumptions embedded kind of consistent with what we knew?

Speaker Change: That's right. So, the only changes that we're seeing is related to new programs, and then there's a couple of

Speaker Change: A couple of programs who are taking on a little bit more responsibility, and there were actually six specific things that are happening that I highlighted. Outside of that, everything is as expected and consistent with what we thought last quarter.

Speaker Change: And then to follow up with Simon, you said that demand

Speaker Change: kind of bridge the, what parts of the business are seeing that elevated demand that's offsetting, you know, the transitory changes to the onboarding process.

Speaker Change: Yeah, I mean the demand has been going up

Speaker Change: It's not that it has gone up in the quarter.

Speaker Change: So, the backlog has gone up because we haven't been able to clear some of the programs. As Mike gave you an indication, out of the 15 programs that were supposed to launch, only 5 launched, which is 30% or 33%. 60% are targeted to launch in Q4.

Speaker Change: So, the areas where we're seeing fraction on the demand side, I'd say there are three areas.

Speaker Change: The first one is on the neobanking side and brands who want to offer banking services to their constituents. That's one. The second one is in flexible payments. I put the Visa flexible credentials, our newly announced product Flex,

Speaker Change: in that and co-brands. And last but not least, there's a lot of software companies that are in the finance automation, either AP automation, expense management, payroll management, that are looking at the commercial banking suite.

Speaker Change: coming into us and I'd say two-thirds of our pipeline right now if I'm not mistaken is embedded finance customers.

Speaker Change: that have, I'd say, a large audience versus, I'd say, FinTechs that are venture funded and hoping to build an audience.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, that was the last question for our question and answer session, and the conference of Marquetta Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.

Speaker Change: R.I.P. Michael Milotich

Speaker Change: Have a nice weekend. Thanks for watching.

Speaker Change: thank you so much for watching.

Speaker Change: Michael Milotich Stacey Finerman Michael Milotich Stacey Finerman Stay safe

Speaker Change: This has been kept underground. Kim Khalaf Sir David Alar

Speaker Change: prepare tomorrow's students. Select information to ask to prepare. Are you ready? Let's start!

Speaker Change: Ladies and gentlemen, greetings and welcome to the Marketa Inc. 3rd Quarter 2024 Earnings Conference Call.

Speaker Change: At this time, all participants are in a listen-only mode.

Speaker Change: As a reminder, this conference is being recorded.

Speaker Change: It is now my pleasure to introduce your host, Stacey Finerman, Vice President of Investor Relations. Please go ahead.

Stacey Finerman: Thanks, Operator. Before we begin, I would like to remind everyone that today's call may contain forward-looking statements.

Stacey Finerman: These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website, including our annual report on Form 10-K for the period ended December 31, 2023, and our subsequent periodic filings with the SEC.

Stacey Finerman: Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of the time of this call and the company does not assume any obligation or intent to update them except as required by law.

Stacey Finerman: In addition, today's call includes non-GAAP financial measures.

Stacey Finerman: These measures should be considered as a supplement to, and not a substitute for, GAAP financial measures.

Stacey Finerman: Reconciliations to the most directly comparable gap measures can be found in today's earnings press release or earnings release supplemental materials which are available on our investor relations website.

Stacey Finerman: Hosting today's call are Simon Khalaf, Marquette's CEO, and Mike Milotich, Marquette's CFO. With that, I'd like to turn the call over to Simon to begin.

Simon Khalaf: Thank you, Stacey. And thank you for joining us for Marketa's third quarter 2024 earnings call.

Simon Khalaf: I will first briefly discuss our Q3 results at a high level, followed by the progress we're making in our business to help transform payments, and last, address the Q4 reduction in growth expectations.

Simon Khalaf: Marquette's business is on solid ground.

Simon Khalaf: and our fundamentals are strong. We have lapped the cash app renewal, and as a result, the third quarter's net revenue, gross profit, and adjusted EBITDA now give a more accurate view of our business trajectory as they demonstrated positive year-over-year gains.

Simon Khalaf: Total processing volume, or TPV, was $74 billion in the third quarter, a 30% increase compared to the same quarter of 2023.

Simon Khalaf: Our net revenue of $128 million in the quarter increased 18% year-over-year.

Simon Khalaf: Gross profit was $90 million in the quarter, a growth of 24% versus the comparable quarter of 2023.

Simon Khalaf: Our non-gap-adjusted operating expenses were $81 million, representing a 9% increase year-over-year, significantly below our gross profit growth rate.

Simon Khalaf: This resulted in an adjusted EBITDA of $9 million in the quarter.

Simon Khalaf: Now let me shift to talk about where we are in the transformation of payments.

Simon Khalaf: The modernization of payments started more than a decade ago on the acquiring side, but has gained momentum on the more complex issuer processing side in the last five years.

Simon Khalaf: Despite the great progress we made, this transformation is still in its early stages.

Simon Khalaf: And Marketa currently accounts for only about 2% of the issuer processing volume in the markets we operate.

Stacey Finerman: There is a long-term secular shift in financial services. The days are numbered for the status quo, as consumers and businesses want modern financial products.

Stacey Finerman: We're driving the shift and have the scale and track record as a trusted ally to innovators.

Stacey Finerman: But there is more we can do to accelerate this transition and reduce the overall time to value.

Stacey Finerman: We recently launched Portfolio Migration.

Stacey Finerman: A new product that simplifies upgrading existing card programs onto our platform, reducing complexity and minimizing disruption during the transition.

Stacey Finerman: This list-and-shift solution allows companies to migrate portfolios from competitor processors to Marketa's modern platform, allowing customers the best of both worlds.

Stacey Finerman: A smooth transition combined with the ability to benefit from the increased capabilities our platform enables.

Stacey Finerman: This capability includes two main components, an automated migration tool that transforms and aligns CART program data from the previous system to Marketta's platform, as well as operational processes to ensure a smooth transition.

Stacey Finerman: We believe this capability can accelerate the shift to our platform and reduce time to value.

Stacey Finerman: In fact, we recently completed the successful migration of millions of Klarna cards across Sweden, Germany, and the UK in October after starting the project earlier this year.

Stacey Finerman: The transition provided Klarna with greater resilience and stability, meeting Klarna's needs ahead of the holiday season.

Stacey Finerman: Millions of PLARNA users now have the best technology, powering their cards, and enjoy rich functionality.

Stacey Finerman: This success serves as a strong proof point when offering similar migration services to other customers, showcasing a modern and seamless solution.

Stacey Finerman: We're also delivering ways to accelerate the launch of new card programs as exemplified by the release of our UX Toolkit.

Stacey Finerman: This capability allows customers to create branded front-end experiences using a comprehensive set of pre-built UI components optimized for Marquetas APIs.

Stacey Finerman: It enabled customers to build a Marketa-powered debit and credit program with fewer development resources.

Stacey Finerman: This is particularly valuable in neobanking, where customers want a straightforward way to manage their money, and in beta finance, where customers want payments to blend into their existing experiences and drive further engagement.

Stacey Finerman: We already have four customers adopting the UX toolkit, integrating the features into their own existing products, and the feedback has been extremely positive.

Stacey Finerman: Also, in keeping with the current regulatory climate, the toolkit was done in a compliance-forwarded manner as these templates have been vetted by banks with specific regulations in mind.

Stacey Finerman: We're also enabling the shift to modern card issuing by leveraging our unique scale and expertise, especially in Buy Now, Pay Later or BNPL.

Stacey Finerman: Last week, we announced Marketaflux, a new solution that revolutionizes how DMPL payment options can be delivered inside payment apps and wallets, surfacing them

Stacey Finerman: when needed within the payment flow.

Stacey Finerman: Many years ago, Marketa expanded the addressable market for BMPL with the use of single-use virtual cards, eliminating the need for providers

Stacey Finerman: to directly connect with merchants.

Stacey Finerman: in order to bring the NPL to the point of sale.

Stacey Finerman: With Marketaflex, we plan to expand BMPL's distribution even further by giving consumers access to personalized BMPL options inside of their payment apps of choice.

Stacey Finerman: We're excited about the participation of Klarna, Affirm, and Branch in the next innovation in the BMPL landscape.

Stacey Finerman: Together, these relationships are helping us create an experience that expands BMPL distribution and enhances the overall payment experience.

Stacey Finerman: We plan to roll out Marketaflex in mid 2025. In the meantime, we will gather additional participation from customers and partners to participate in this new approach to scaling BMPL.

Speaker Change: With all this great progress, why is our guidance for Q4 softer than expected?

Speaker Change: Well last year the regulatory environment changed amongst the smaller banks that support many of our customers program.

Speaker Change: As a company, we anticipated this change and invested in program management in general and compliance services in particular.

Speaker Change: We believe that these investments have positioned us well in the medium and long term and increased the moat around our platform, especially in embedded finance.

Speaker Change: However, we underestimated the increased operational burden these changes made on both Marquette's and the bank's onboarding and compliance teams.

Speaker Change: The incremental scrutiny and rigor translated into delays in launching new programs. These delays have also been aggravated by the increased demand from new bookings in 2023 and the first half of 2024.

Speaker Change: On average, the time to launch new programs grew 30% to 40% from 2023, and we expect that increase to remain for at least two additional quarters.

Stacey Finerman: as we and our bank partners become more agile in launching programs in this new environment.

Stacey Finerman: Given the stand-in ramp time for programs in our industry, these delays will cause volume and gross profit to be pushed out a few months.

Stacey Finerman: Now, with a more complete understanding of the implications, we're taking a more holistic approach to ramping the programs we have already signed.

Stacey Finerman: We are also signing up new banks to add capacity and open up new choices for our customers while making our processes standardized across all banks we support.

Stacey Finerman: We are confident these changes will give us the agility we need. However, it will take a few months to completely solve the problem and drain the backlog that has been built up.

Stacey Finerman: We view the headwinds from the more challenging bank environment as short-term, merely slowing down our progress rather than a change in the trajectory of our business, nor impacting our path to profitability.

Stacey Finerman: In fact, we remain confident in our strategy, business trajectory, and execution.

Stacey Finerman: We've been a large contributor to transformation in the payments industry and a trusted ally to our customers who seek an engaging and compliant customer experience. We've done it with an eye on the horizon and a nose to the ground.

Stacey Finerman: Although the current banking environments have shifted the curve out, the fundamentals of our business are strong, our pipeline continues to grow, and we are confident in our ability to demonstrate strong, long-term, profitable growth.

Mike Milotich: With that, I'll pass it on to Mike.

Mike Milotich: Thank you Simon and good afternoon everyone. Our financial results in Q3 better reflect the growth trajectory of the business now that we have lapped the cash app renewal.

Stacey Finerman: Strong TBV growth continues to be broad-based across several use cases and geographies, fueling our gross profit growth.

Stacey Finerman: Nevertheless, TBV and gross profit growth were a little lower than we expected due to a smaller contribution from the launching of new programs, which I will cover in detail in a few minutes.

Stacey Finerman: Our path to profitability, however, remains on track as adjusted EBITDA was $2 to $3 million better than expected due to continued execution of efficiency and optimization initiatives.

Stacey Finerman: Q3 TPV was $74 billion, a year-over-year increase of 30%.

Stacey Finerman: Non-block TBV grew more than 15 points faster than block TBV growth due to strength across a large number of customers and use cases.

Stacey Finerman: Our top ten non-block customers grew over 30% and our remaining non-block customers grew over 50% year-over-year.

Stacey Finerman: Financial services, lending, including Buy Now Pay Later, and expense management all grew at roughly the same rate for the third quarter in a row, slightly faster than the overall company.

Stacey Finerman: Financial Services continues to deliver strong growth despite being by far our largest vertical.

Stacey Finerman: Locke continues to flourish, and our newer neobanking and accelerated wage access customers are expanding rapidly, growing well over 100%, and are now contributing more than 10% of total company TPV.

Stacey Finerman: Lending, including Buy Now Pay Later, continues to be aided by the adoption of our BNPL customers Pay Anywhere card solutions, as well as customers utilizing our platform in support of SMB lending solutions.

Stacey Finerman: Expense management growth has been very steady each of the last three quarters with several of our top customers remaining maintaining robust growth fueled by new users.

Stacey Finerman: The growth of on-demand delivery, our most mature use case, slowed into the single digits this quarter.

Stacey Finerman: Q3 net revenue was $128 million, growing 18% year-over-year.

Stacey Finerman: Net revenue growth is almost 13 points lower than TPV growth, a larger than typical gap, primarily for two reasons.

Stacey Finerman: First, strong TPV growth in recent quarters among many of our Powered by Marketa customers has shifted the mix of our business.

Stacey Finerman: The Powered By revenue take rate is much lower than Managed By as a result of there being minimal cost of revenue, which contributed a mid-single-digit impact when comparing revenue and TPV growth.

Stacey Finerman: This impact is less significant when comparing gross profit take rates for the powered by and managed by business.

Stacey Finerman: Second, the renegotiated platform partner agreement that went into effect in Q1 2024 drove a low to mid single-digit headwind on a year-over-year basis.

Stacey Finerman: It is important to note that this change only impacts revenue, not gross profit, as a result of the new Cash App Revenue presentation and will lap in Q1 2025.

Stacey Finerman: Block net revenue concentration was 47% in Q3, consistent with last quarter. Non-block revenue growth was over 10 parts higher than block net revenue growth.

Stacey Finerman: Our net revenue take rate of 17 basis points was slightly lower than last quarter, primarily driven by business mix from the increasing TPV contribution of Powered By and a few of our largest Managed By customers.

Stacey Finerman: Q3 gross profit was $90 million, resulting in a 24% year-over-year growth and a 70% gross profit margin.

Stacey Finerman: Gross profit growth was approximately two points lower than expected, as a result of lower contribution from new programs in the quarter. There are two reasons for this.

Stacey Finerman: First, 15 programs we expected to launch in the quarter were delayed by an average of 70 days.

Stacey Finerman: We were less efficient in working with our bank partners to launch new programs, which we attribute to the increased regulatory scrutiny over the last few quarters on the banking industry, particularly the smaller banks supporting fintech and embedded finance.

Stacey Finerman: Although we anticipated challenges as a result of the increased scrutiny, we significantly underestimated the impact of constrained resources and evolving processes.

Stacey Finerman: Now we have a backlog of programs to launch. Unfortunately, as the backlog builds and the ramp of programs is shifted out in time, there are bigger implications for Q4 and 2025, which I will cover in more detail in a few minutes.

Stacey Finerman: Second, our new programs that have already launched in aggregate are not performing as expected.

Stacey Finerman: Because we serve many innovators and disruptors, Marquetta has always viewed launch cohorts as a diversified portfolio of programs, with customers achieving varying levels of success.

Stacey Finerman: The cause of gross profit underperformance can happen for several reasons, including changes to the customer's level of investment or resource allocation, the value proposition needing refinement, or higher cost of revenue than projected.

Stacey Finerman: Our gross profit take rate was 12 basis points, one base higher than last quarter, driven by higher incentives in Q3.

Stacey Finerman: This is the result of the annual reset of incentives in Q2 based on the contract years.

Stacey Finerman: Q3 adjusted operating expenses were lower than expected at $81 million, an increase of 9% versus last year.

Stacey Finerman: To fully benefit from our scale, we are focused in our hiring, continue to utilize multiple geographic locations to find the best talent, and are executing our efficiency and cost optimization initiatives well.

Stacey Finerman: All of these scale benefits help deliver higher than expected Q3 Adjusted EBITDA of $9 million, resulting in a margin of 7%.

Stacey Finerman: Interest income was $14 million.

Stacey Finerman: Q3 gap net loss was $29 million.

Stacey Finerman: In Q3, we repurchased over 9 million shares at an average price of $5.15 for $49 million. We ended the quarter with $1.1 billion of cash and short-term investments.

Stacey Finerman: Now let me walk through our latest Outlook for Q4.

Stacey Finerman: We expect Q4 net revenue growth to be between 10 and 12 percent, and Q4 gross profit growth to be between 13 and 15 percent, a 6 and 9 point reduction respectively, compared to what we shared in early August.

Stacey Finerman: The change in our expectations is primarily driven by two factors, both of which stem, to some degree, from the heightened regulatory environment from our bank partners.

Stacey Finerman: First, we now expect significantly fewer new programs will launch and ramp up in the second half of the year, lowering gross profit growth by approximately six points.

Stacey Finerman: We were not quick enough with solutions and new processes for our bank partners, and they are more focused on maintaining current programs in the heightened regulatory environment than launching new programs.

Stacey Finerman: In some cases, this environment also delays our customers' launch plans.

Stacey Finerman: Now that we have a backlog of programs to launch, it will take time to work through it.

Stacey Finerman: Delays of a few months pushes launches into Q4 and the first half of 2025.

Stacey Finerman: Because of the ramped trajectory of TPV in the first year of a program, a few months delay meaningfully impacts Q4.

Stacey Finerman: The impact is larger on gross profit than revenue, since newer programs with subscale volume tend to have high gross margins until our customers work through the initial volume tiers in our contracts.

Speaker Change: Why does this change in assumptions seem so sudden?

Speaker Change: We have been very aware of the scrutiny and working through it with our bank partners, investing significantly more in our compliance efforts since the start of this year to raise our program management standards ahead of the rising tide.

Stacey Finerman: However, in the past two to three months, it has become clear we greatly underestimated the magnitude and time horizon for all parties to adapt to the new standards.

Stacey Finerman: We are actively executing the solution for this challenge, working closely with existing bank partners to optimize our processes to improve the efficiency of program approval and onboarding.

Speaker Change: In addition, we plan to onboard at least two additional bank partners to increase our bank supply to meet our growing demand.

Speaker Change: The second factor is a few highly sophisticated, long-term FinTech customers are moving quickly to take ownership of more of the program components in this heightened environment, lowering gross profit growth by two to three points.

Speaker Change: We have two customers quickly shifting their resources to take on more program management responsibilities, one customer bringing more RISC services in-house, and three customers connecting their platforms directly to their end users to reduce their reliance on card usage.

Speaker Change: All of these actions reduce our volume or our take rate.

Stacey Finerman: We do not believe these types of customer actions will become broad-based, because very few want to prioritize this type of work, or have the scale and sophistication to execute in a way that is accretive to their business.

Stacey Finerman: Outside of these two factors, the business is mostly on the trajectory we expected several months ago.

Stacey Finerman: Based on our Q4 outlook, we expect full-year 2024 net revenue growth to be approximately negative 26 and full-year 2024 gross profit growth to be approximately 6%.

Stacey Finerman: Despite some setbacks to gross profit growth, we continue to execute cost optimization and efficiency initiatives to drive higher adjusted EBITDA, as shown in the Q3 outperformance. We now expect our Q4 adjusted operating expense growth to be in the high single digits,

Stacey Finerman: with sufficient investment in resources, specific capabilities, and platform resiliency to best serve our customers and drive future growth.

Stacey Finerman: Therefore, we expect our Q4 adjusted EBITDA margin to be 5-7%, only one point lower than the expectations shared last quarter, as a result of better operating discipline.

Stacey Finerman: Based on this Q4 outlook, we expect full year 2024 Adjusted EBITDA margin of approximately 5%.

Stacey Finerman: While it is too early to discuss our 2025 expectations in detail, at this point we believe Q4 2024 is a good indicator for 2025.

Stacey Finerman: Gross profit growth in 2025 could be similar to Q4 2024 as we solve for new program launch delays, pushing the ramp of programs to later in 2025.

Stacey Finerman: Also similar to Q4, our expectations for 2025 Adjusted EBITDA are not changing from what we shared at our 2023 Investor Day.

Stacey Finerman: Being ahead of schedule on our expense optimization work should enable us to deliver adjusted EBITDA of approximately $50 million in 2025 and remain on track to exit 2026 GAAP profitable.

Stacey Finerman: We believe these challenges with new programs are a short-term issue impacting the next several quarters as a result of shifting out the new program ramp curve, rather than a structural change in our business that impacts the growth trajectory beyond 2025.

Stacey Finerman: To wrap up, we had a strong quarter delivering robust gross profit growth combined with an improving Adjusted EBITDA trajectory.

Stacey Finerman: We are beginning to realize the benefits of our scale, both in generating profitable growth, but also in the opportunities we are discussing with embedded finance prospects, looking for a highly capable, multinational partner to support several use cases.

Stacey Finerman: Although our gross profit growth in the coming quarters will be lower than our previous expectations, we are still a market-leading platform generating mid-teens growth with a rapidly rising adjusted EBITDA.

Stacey Finerman: Our underlying business remains strong and our differentiation in the market remains clear.

Stacey Finerman: The delays in launching new programs is a small setback on a long, prosperous journey of modernization of issuer processing that Marketa is well positioned to lead.

Stacey Finerman: I will now turn it over to the operator for Q&A.

Stacey Finerman: Thank you.

Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session.

Speaker Change: If you would like to ask a question, please press star and 1 on your telephone keypad.

Speaker Change: A confirmation tone will indicate your line is in the question queue.

Speaker Change: You may press star and 2 if you would like to remove your question from the queue.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Ladies and gentlemen, we request you to restrict to one question and one follow-up question per participant.

Speaker Change: The first question comes from the line of Ramsey LSL from Barclays, please go ahead.

Ramsey LSL: Thank you for taking my question this evening.

Ramsey LSL: Can you comment on your your visibility at this point given everything that's going on in terms of these regulatory driven sort of changes?

Ramsey LSL: is, you know...

Ramsey LSL: Are you confident that you're seeing sort of a bottoming out of the sort of pain here, or could we get to next quarter and see that things have deteriorated further? And I'm also just wondering whether there's a risk that some bookings may get terminated if the implementation timeline stretches out for too long.

Speaker Change: Now let me take that Ramsey and then pass it over to Mike. So what I would say is we do have the visibility because we have bottomed out.

Ramsey LSL: And I say that for multiple reasons.

Ramsey LSL: is that we have anticipated the changes. What we have not anticipated is the impact...

Ramsey LSL: on the onboarding process with our banks.

Ramsey LSL: So, just to give you specific examples, it's not that I say the rules have changed, it's more the third-party oversight and the scrutiny upon launching a program that have changed.

Ramsey LSL: So, as an example, as we actually change something in the program, it goes back to the top of the queue versus being done in parallel.

Ramsey LSL: So these are procedural changes versus, I say, material changes. So the regulators have a tough job, but I do believe we are over the hump when it comes to what do we need to fix.

Ramsey LSL: in order for us and our banking partners to go back to, I'd say, the ordinary times to get a program out.

Ramsey LSL: It will take time to drain the backlog because it's not that our demand went down, it actually went up.

Ramsey LSL: So we have some backlog that we have to drain.

Ramsey LSL: And in terms of your questions about...

Ramsey LSL: Will people run out of patience as they are in the queue? We don't expect that. I mean, both entities, like, this is not an instance in which both parties are not committed to the partnership. There's a lot of work that goes into it, from development to onboarding to risk management. So we're pretty quite committed, so are our customers. And we have – I mean, they all understand the environment. We're not the only entity impacted by it. So we're working with them. And on the contrary, they have been extremely supportive, and they continue to be excited about the programs that they want to launch. Mike, anything you'd like to add, too? Yeah, just maybe I'll just give some color on –

Mike Milotich: on just the specifics on some of the delays, Ramsey. So, you know, if you look at the first few months of 2024, the regulatory scrutiny had clearly ratcheted up with more than 10 consent orders affecting, you know, the banks in our space.

Mike Milotich: And so what we saw was an initial spike in the time to launch that was more than 2x the average in 2023. So, 2023 onboarding and delivery was typically around 150 days, roughly, and in Q1-Q2 that rose to over 300 days.

Ramsey LSL: This was the...

Ramsey LSL: And so the time still remained over 200 days when it had previously been about 150 days. So...

Ramsey LSL: So that just gives you a little more color on sort of the magnitude of what's happening.

Ramsey LSL: And to just address your second question in terms of visibility, so we had 15 programs that were delayed on average of 70 days, but when you break that down into components, so five of those 15 actually did launch in Q3, but just much later than expected.

Ramsey LSL: Nine programs are now expected to launch in Q4, so a little more than half are now being pushed into Q4, and then one is slipping into Q1 of 2025. So, you know, we have pretty good visibility now that we've started to implement some of the solutions to address these challenges.

Ramsey LSL: So we, you know, we, you know, there, of course, there's still some unknowns, but for the most part, we feel good about, you know, the projections we're sharing in terms of our outlook.

Speaker Change: Okay, thank you very much for that and just a quick follow-up. You also called out some new programs that that launched that are not performing as expected. Can you give us a little more color there and also maybe comment on the degree to which

Speaker Change: you might be able to change the trajectory there. You mentioned things like refining the value proposition or maybe investment levels of your customers. Is it sort of like now that those cohorts are performing as they are, it's just that's the way it's going to be, or could you see a change as time passes in terms of performance?

Speaker Change: Yeah, so there's definitely ways to impact the trajectory, as I mentioned in sort of my prepared remarks.

Speaker Change: The key is when we're looking at new program launches, we look at them as a portfolio and we look at them in aggregate because of the nature of the types of customers we serve.

Ramsey LSL: We're a little bit of a hits-driven business where we'll have a few programs within a new launch cohort that experience a lot of success.

Ramsey LSL: and you have some customers whose value proposition doesn't quite hit the mark and needs to be adjusted. So.

Ramsey LSL: We are, I guess...

Ramsey LSL: We typically see this type of type of outcomes and then we work with the customers who are not experiencing as much success to implement changes, help them refine their value proposition and get those changes through the bank.

Ramsey LSL: I would say it's not...

Ramsey LSL: that unusual. I think what

Ramsey LSL: is a little bit different, is because of all the program delays, the...

Ramsey LSL: the sample size is now much smaller.

Ramsey LSL: and with a much...

Ramsey LSL: that you would normally have with a lot more programs going going live and so we'll continue to work with them and and try to obviously improve performance everyone's incentives are aligned in that regard

Ramsey LSL: Thank you.

Speaker Change: The next question is from the line of Darren Peller from Wolf Research. Please go ahead.

Darren Peller: Hey guys, thanks. Just a couple of follow-ups on this topic. I mean, I guess number one, you know, in terms of your confidence level that your current existing customers

Darren Peller: that haven't been yet impacted by this, shouldn't be impacted by this going forward. Can you just help us understand what gives you any conviction around that? And then I guess it's great to hear the visibility on the 15. That really was helpful, actually, in terms of the onboarding timing.

Ramsey LSL: But maybe just help us understand a little bit more about what gives you confidence that, you know, ongoing or other new customers don't change their mind about the operating business.

Ramsey LSL: maybe just a quick follow-on would be maybe help us if you could help us with anything around verticals or where this fits into your business a little more I understand it's

Ramsey LSL: It's partners with smaller banks, obviously, that are acting as sponsor banks, but any more color on where this fits in terms of verticals or anything else would be helpful. Thanks, guys.

Speaker Change: Thank you, Darren. Let me take the first question and then I'll hand it over to Mike.

Speaker Change: I'd say in terms of our existing customers...

Ramsey LSL: We at Marquera have taken a lot of steps early on before the increase in the regulatory scrutiny and our consent orders in order to review all our programs and the procedures that are put in place, I would say, dating to programs that have launched.

Ramsey LSL: for two years.

Ramsey LSL: So we're pretty comfortable that whatever is out there and launched is pretty good in terms of being able to sustain more rigor in the regulatory system. It's almost like we've done the parking lot exercise. We looked at everybody and said, okay, no, these programs are solid.

Ramsey LSL: And then whenever we have questions, we actually put our partners through the task.

Ramsey LSL: So, feel comfortable about that. Now, in terms of your second question, as in like, hey, why are you confident that customers are not going to drop off, right, if the time it takes to launch these programs has increased?

Ramsey LSL: So, number one, we stayed in touch.

Ramsey LSL: with our customers.

Ramsey LSL: and we've worked, I say, in lots of steps with them on all the changes that are necessary, number one.

Ramsey LSL: Number two is...

Ramsey LSL: We've spoken to them about reducing the number of changes, as in reduce the scope.

Ramsey LSL: Right? And, and...

Ramsey LSL: don't iterate as much at the beginning, so we don't put them back at the end of the queue. And they've been responsive to that. And the third thing we've done is we moved some of our resources to actually consult with our customers. I hate to use the word data right the first time, but it's almost that, as in, hey, let's,

Ramsey LSL: Let's use the experience we have from the 400 programs that have launched.

Ramsey LSL: and recognize that that's going to be the construct.

Ramsey LSL: that is going to be working versus being extra cute to actually win a few points with consumer here and there. So probably the word discipline is what I would use.

Ramsey LSL: early on in the cycle, but I would I would be extremely surprised if we have follow-up given how

Ramsey LSL: how invested our customers are in the solutions that they're about to launch.

Speaker Change: Yeah, one just thing I'd add to that, Darren, is just when you...

Ramsey LSL: If you look back on, since we started really meaningfully increasing our bookings over the last year and a half to two years.

Ramsey LSL: You know, we've talked about that more than half of those tend to be with existing customers of ours who are doing new programs, so they're...

Ramsey LSL: expanding into new markets or they're doing new use cases. And so they're very aware, they can feel the change.

Ramsey LSL: a pretty good understanding from from everyone involved that this is

Ramsey LSL: not a Marquette issue or specific to, you know, the bank partner we may be working with, but this is a much broader change that's happening in the industry, especially if they speak to other other banks or, you know, other people they know in the industry, it's pretty broad based. And so we're, we're not seeing

Ramsey LSL: You know customers questioning, you know, why why this is happening? I mean everyone's sort of feeling the impacts

Ramsey LSL: go through the onboarding process, and it's really affecting all use cases. That said, just to reinforce something Simon mentioned, you know, we are trying to encourage customers to stick.

Ramsey LSL: to constructs that we know have been pre-approved and moved through, so moved previous programs through. So, you know, limiting your changes and trying to get it live and then going from there to maybe refine the value prop over time.

Speaker Change: Yeah, all right. I was gonna just kind of add on to that specific topic, Mike, you mentioned about sticking to the construct, but I mean, have you guys, I'm assuming you guys have been able to talk, touch base with the underlying regulators just to see and get a feel for if there's any more material incremental changes that are going to be required?

Speaker Change: We're always talking to everybody in the ecosystem, including the regulatory buddies. Like I said, they have a tough job.

Speaker Change: But I wouldn't say that, like...

Speaker Change: This is...

Speaker Change: like, hey, incrementalism. It is more that most of the reactions have been to things that have happened in the past.

Speaker Change: and not by Marquera, but we live in an ecosystem in which a bad apple ruins the whole ecosystem. So as an industry, right, what happened is the regulators came strong against some of the underlying banks.

Speaker Change: and there is an overall increase in third-party oversight. But we don't expect that environment to change, because there isn't anything, I would say, that is anything but.

Ramsey LSL: the banks and ourselves, or the industry in general, doing what they're supposed to do. The other thing, what we've done, Darren, is, I'd say at the beginning of this year, we've moved bank vetting into early stages in our pipeline.

Ramsey LSL: So we do not go into contracting with anyone.

Ramsey LSL: before the banks have vetted the solution.

Ramsey LSL: So, that is a change that we've done in order to increase, I'd say, the chances of anything we sign to go live.

Ramsey LSL: So that also increases our confidence and I think that helped in effectively weeding out the solutions that are not going to make it through the bank so that we become more efficient in handling delivery.

Speaker Change: Thank you. The next question is from the line of Tien Sing Hoang from J.P. Morgan. Please go ahead.

Speaker Change: I thank you for going through all of this and I appreciate the you're sticking with the 25 EBITDA outlook so I just want to

Speaker Change: I wanted to clarify here that with all the work that you're doing to remedy the situation, I ought to presume there'd be additional costs or maybe some de-leveraging there. Am I misunderstanding that? Just can you walk us through what you're doing on the remedy side and the impact on the P&L and why you're confident in protecting EBITDA?

Speaker Change: Thank you, Tingen. I would say the cost has already been incurred because as a company, and I think we spoke about it multiple times, Tingen, we started the investment in compliance.

Speaker Change: early on.

Speaker Change: It is the largest investment we've made, tailing the 23 and going into 24.

Speaker Change: But also, we've...

Speaker Change: We've automated a lot of our processes, number one.

Speaker Change: And we have decided to onboard a lot of Marketans outside the United States as well in Poland when it comes to risk management and compliance operations.

Speaker Change: and in Toronto on the development and prop tech side. So we're taking all these steps.

Speaker Change: The things that are...

Speaker Change: that we could not actually predict was whether the banks themselves

Speaker Change: had to increase their OPEX in order to meet those changes. And we're comfortable, our compliance team is comfortable with the investment the banks have done themselves.

Speaker Change: in order to meet this new reality. Now, to answer your kind of, what are we doing about it, right? I'd say the number one thing we're doing is...

Speaker Change: becoming more efficient without existing banks. I mentioned...

Speaker Change: sticking with existing constructs, looking at use cases that have worked, and reducing the tweaks.

Speaker Change: that actually don't matter, so that they don't go through the process. We are adding a couple more banks to help with the supply side. And last but not least…

Speaker Change: We've placed...

Speaker Change: some of our experts in the field to consult with our customers to get it right the first time. I do believe all of these steps.

Speaker Change: give us the confidence that not only will we be able to be differentiated and increase the moat on our solution in the medium and long term, but we'll be able to help us drain the backlog versus continuously add more deals to the backlog.

Speaker Change: And just to add maybe a couple of details, Tingen, you know, normally we wouldn't comment a lot on 25 at this time, but we're being more transparent based on the circumstances, you know, at this point, our view of 2025 gross profit from programs that launched prior to 2024.

Speaker Change: is not much different than what we thought a year ago at Investor Day. So the change that we're seeing on 2025 is really centered around new programs that we're launching in 2024.

Speaker Change: and the way we look at that, just so you have a sense, is there's a typical ramp of TPV.

Speaker Change: that we assume based on historical data. So we've looked at, you know, literally over 100 programs that we've launched. We remove outliers, both good and bad.

Speaker Change: and you use that and you sort of see a trajectory of how a program grows over time. And it's that typical ramp that we use to project our business.

Speaker Change: And as you can imagine, in the first couple of months, the volume is pretty light as the program gets started. So in that first six months,

Speaker Change: 90% of the volume for that program happens in months four to six. So the first couple of months are pretty slow. Months four to six, things start to pick up.

Speaker Change: And then from month 7 to 12, the volumes are 6x larger than the first 6 months.

Speaker Change: So the curve starts ramping very steep, and then months 13 to 18 is then 3x larger than months 7 to 12.

Speaker Change: When you start to look at that curve, what you...

Speaker Change: start to kind of understand why I want to show that detail is if you just start shifting that a few months it has

Speaker Change: pretty big implications into our ability to realize revenue and gross profit. And that's what is happening from a timing perspective. So that's why we're confident that by 2026, we should be back on the pace that we expected from our investor day, we just need a little time to work through these challenges.

Speaker Change: and solve for the backlog.

Speaker Change: But that's...

Speaker Change: that's kind of where we are from a gross profit perspective, and then because we've made so much progress on the expense side, we still believe that we'll be able to meet the EBITDA projections that we signed up for of about $50 million.

Speaker Change: One thing I'll add, Tingen, is that we've been tracking this curve for, I'd say, over a year now, and with every program we launch, we haven't seen any statistically significant deviation from the curve. So I think our confidence is pretty high that that's what programs on a cohort-by-cohort basis will look like.

Speaker Change: Okay, now that's encouraging. Thanks for going through that.

Speaker Change: The next question comes from the line of Timothy Chiodo from UBS. Please go ahead.

Timothy Chiodo: Great. Thank you for taking the question. So, I just want to recap. So, this question is for Mike. So, it sounds like there's three factors. The first is the timeline push out of new programs. The second one is some of the changes with a little bit of in-house or in-sourcing, if you will, from some of the more sophisticated customers. And then the third, and it sounds like maybe a lesser factor, is the early performance of some of the more recently launched programs.

Speaker Change: I want, I believe that's the stack ranked order, I would like to just confirm that. And then I was hoping, Mike, if you could maybe just dig in a little bit more around the sophisticated customers, the types of customers those are, they are, you said some of them are doing a little bit more of the PM in-house, some of them are doing a little bit more risk in-house. Maybe you could just dig into that more.

Mike Milotich: Sure, so just to confirm what you said Tim, so yes, I would say it's more

Mike Milotich: Q-Factors, so it's the timeline of these new programs, and then it's...

Mike Milotich: Some of our sophisticated FinTech customers, you know, doing more things in-house, I would say the early performance is kind of part of the new program impact and it's quite small. It's really not that significant, so I would say it's really two primary factors. And to give you a little more color on what we're seeing for our customers who are bringing more things in-house, we have...

Mike Milotich: two customers who are taking over the bank relationship.

Mike Milotich: So, although we're going to still provide some program management capabilities for them and services, they are going to manage the bank relationship directly.

Mike Milotich: So that's one change or a type of change. We have another customer who's bringing more RISC services in-house based on a homegrown solution. So this is a large, sophisticated customer who has been building this for some time and is pulling this in.

Mike Milotich: And then we also have three customers where they're connecting their platform directly to their end users to reduce their reliance on card. So, as you know, if you think about what we do in Buy Now, Pay Later, on-demand delivery, AP automation,

Mike Milotich: In all those use cases, those customers can execute their business without issuing cards. What we've allowed them to do is dramatically, is scale much faster. But in this case, in this environment, there are three customers that have done some direct connections, and we're gonna lose that volume, and that's what's contributing to about two to three points of...

Mike Milotich: And again, as I mentioned before, this is...

Mike Milotich: This is something that I would say, individually, events like this have happened in the past and are part of our business.

Mike Milotich: What's different here is that there's a concentration of this activity in a short period of time that's making it impactful.

Mike Milotich: So, none of these things in isolation, I would say, would be events, but the fact that they're all happening at once is what makes it more impactful, which is why we attribute it at least to some degree to the overall environment that we're going through, that we're seeing customers move.

Mike Milotich: sort of quickly and in a time frame that we haven't typically experienced, and that's why, you know, we're, you know, we're having to sort of adjust our expectations in a relatively short order of time.

Speaker Change: Thank you, Mike. And then a more brief one. So Visa said on their earnings call around Visa Flexible Credential, and I quote, they said they have, we have hundreds of issuers in the pipeline and several launches planned for 2025 for the new Visa Flexible Credential. Clearly, you've been one of the first to be certified to work with Visa Flex Credential. Is it safe to assume that of those hundreds that they mentioned that Marquetta should be working with some portion of them or any additional context you could provide there?

Mike Milotich: Yeah, uh...

Mike Milotich: Thank you for the question. So, yes, we were the first.

Mike Milotich: And I'd say that...

Speaker Change: We are in the midst of a launch, as in like going live, and we expect that actually to happen either tomorrow or Wednesday. And it starts into the ramp phase on the 15th of November. So, the reception, as we said last time, has been great.

Speaker Change: and we're very comfortable with it. So, yes, it has increased the demand on our services.

Speaker Change: both in the U.S. and the U.K. and the E.U.

Speaker Change: Thank you. The next question is from the line of Sanjay Sakkarani from KBW. Please go ahead.

Sanjay Sakkarani: I guess, Mike, you mentioned, or Simon did, that what you were seeing is not dissimilar to what others have seen in the industry. I mean, have you guys validated that? Have your competitors also seen similar product launch delays?

Speaker Change: Good question. Actually, as a team, we were at Money2020 last week, which is the conference for new financial services, and I'd say that the number one thing that was discussed

Speaker Change: was how everyone is now taking compliance and, in general, in regulatory compliance.

Speaker Change: Seriously, and everybody's talking about the delays.

Speaker Change: but they're also talking about the flight.

Speaker Change: which is they're coming to Marqueta because we were the entity that has invested early on.

Speaker Change: in the cycle, and also we heard a lot of folks that thought that they could use bass players.

Speaker Change: kind of like an alternative to Marquetta, that actually has disappeared because a lot of folks mention that

Speaker Change: They're seeing almost these solutions...

Speaker Change: Fizzle out in terms of in terms of the ability to to to take on a scale programs

Speaker Change: So, yes, we're not unique into that, into this environment, but I do believe we had a head start in compliance, and we will get over this hump in terms of the operational burden that ourselves and a couple of our bank partners have faced. Yes, Sanjay, we also have several programs in our pipeline.

Speaker Change: for people who have been notified that they're going to have to leave their bank, that the bank is even exiting the space, or...

Speaker Change: or terminating their partnership with whatever platform they're on. So there is, I guess, several data points out there that suggest that this is not a Marquette-specific issue.

Speaker Change: Okay, just a follow-up question Mike you talked about the fourth quarter run rate revenue gross profit being good proxy for 2025

Speaker Change: I guess, is that a worst-case scenario, or could that be ratcheted down? And I guess, like, when we think about the deferral, let's just say it's 60 days...

Speaker Change: Like, does that mean that you see a step up in the second half of next year under that paradigm or is it more even? I'm sorry, I know you're not giving 2025 guidance, but just understanding sort of the cadence of that.

Speaker Change: Yeah, no, it's fair enough. I think the yeah, we wanted to give

Speaker Change: you know some indication just as we're resetting expectations just to be transparent with all of you.

Speaker Change: So, I think it all depends, Sanjay, on how quickly we work through the backlog. So, I think we feel good about the solutions we're starting to implement, and we're seeing progress. So, we kind of...

Speaker Change: feel like we're maybe over the hump, we're not past it, but we're kind of over the hump?

Speaker Change: The question is then how quickly can we work through the backlog as we also had programs that were expected to launch in Q4 that are now kind of

Speaker Change: you know, in the queue, if you will, so it...

Speaker Change: It all depends how quick, how long they stack up, I think will determine what the quarterly trajectory looks like for 2025 and that's something that we'll obviously have a much better, you know, idea of in late February when we when we talk again and we'll be able to give a quarterly cadence at that point.

Speaker Change: Thank you. The next question comes from the line of Andrew Schmidt from Citi. Please go ahead.

Speaker Change: Thanks for watching!

Andrew Schmidt: Hi Simon, hi Mike, thanks for taking my questions and really appreciate all the detail here.

Andrew Schmidt: So, it makes sense in terms of the increased scrutiny, the elongated time frames, but I guess just in terms of changes that are required on the Marketa platform, could you comment whether there is anything that needs to be changed? Obviously, you know, we've heard, you know, things like...

Andrew Schmidt: You know more more detail or transparency at the sub FBO level things like that. Nothing that's you know significant But I'm just curious as a result of this if there are also changes to the platform As a result in addition to kind of some of the just the process changes you're making. Thank you so much

Speaker Change: Thank you Andrew for the question. I mean the short answer is nothing that our compliance team has not started working on. I mean we do, there's always room for improvement in everything we do, especially when it comes to the automation side, the reporting, consolidated dashboards.

Speaker Change: But conceptually, it's not that the requirements have changed. It's more, do we increase doing something just to increase the visibility?

Speaker Change: that our compliance and regulatory teams have. Just to give you an example, the team is building a great dashboard that can operate in near real time.

Speaker Change: on the compliance side, so that they are actually more in tune with some of the programs that are launching early. But I guess the short answer is there is nothing that we're changing that we did not know we had to change before, because of the maturity and the scale at which some of our customers are operating at now.

Speaker Change: Got it. Thank you for that, Simon.

Speaker Change: And then maybe I could ask on the new sales environment, obviously the focus here is working for the backlog. But have you seen, you know, hesitancy from new candidates in the pipeline, given just what's going on in the environment? And then just.

Speaker Change: More broadly speaking, as you think about just draining the backlog, do you shift some resource of new sales to implementation? I'm just curious just overall on the new sales environment. Thank you very much. It's a great question. It's a great question. We have moved resources.

Speaker Change: to help.

Speaker Change: But I'd say what we've done the most of is having our delivery team use their expertise and hard expertise to help our customer get it right the first time. I'd say that's the first step we've done.

Speaker Change: We're also looking at a mechanism to decide how do you prioritize things going through the pipeline so it's not a first in, first out also. The other thing we've done is we've taken on some of the vetting ourselves.

Speaker Change: So, to help our bank partners. Now, in terms of, have we kind of like, does the top of the pipeline as the funnel, is it impacted as in, hey, because of the regulatory scrutiny, our customers shine away from this?

Speaker Change: I'd say it's quite the contrary, and our pipeline continues to grow despite the bookings increase. And I can only point to growth in our pipeline, specifically from embedded finance customers.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Andrew Bouch from Wells Fargo. Please go ahead.

Andrew Bouch: Hey, thanks for taking the question. So, if we think about the six-point headwind to gross profit growth in the fourth quarter, is it fair to assume that the existing, call it, same-store sales estimate within that is unchanged from from where we were just three months ago? Meaning, you know, is your macro assumptions embedded kind of consistent with what we knew?

Speaker Change: Yes, I mean, the demand has been going up it's not that it has gone up in the quarter. So.

Speaker Change: The backlog has gone up because we haven't been able to clear.

Speaker Change: Some of the programs as Mike gave you an indication.

Speaker Change: <unk> programs that were supposed to launch only five launch which is 30% or 33% 60 are targeted to launch in Q4, so the areas, where we're seeing traction on the demand side I'd say, there's three areas.

Speaker Change: First one is on the on the Neo banking size and brands, who want to offer banking services to their constituents. That's one the second one is in.

Speaker Change: Flexible payments.

Speaker Change: The visa flexible credentials, our newly announced product flex.

Speaker Change: In depth and co brands and last but not least there's a lot of software companies that that are in the finance automation either.

Speaker Change: AP automation expense management payroll management that are looking at the commercial banking suite and coming into us.

Speaker Change: I would say two thirds of our pipeline right now if I'm not mistaken is embedded its finance and.

Speaker Change: <unk> finance customers.

Speaker Change: That are that are that have I'd say, a large audience versus I'd say for index.

Speaker Change: That are that are venture funded and hoping to build an audience.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen that was the last question for a question answer session and.

Speaker Change: The conference off market Op, Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.